Bank of England Weighs in on LIBOR Transition with a Mandatory Additional LIBOR Collateral Haircut

The Bank of England has published a market notice on risk management approaches to collateral referencing LIBOR for use in the Sterling Monetary Framework. The market risk notice applies to GBP LIBOR, USD LIBOR, EUR LIBOR, JPY LIBOR and CHF LIBOR. It states that from April 1, 2021, a haircut add-on will be applied to all LIBOR Linked Collateral maturing after December 31, 2021. LIBOR Linked Collateral is LIBOR Linked Loan Portfolios, Collateral Securities where the coupon pays interest calculated by reference to LIBOR, Collateral Securities where embedded swap payments are calculated by reference to LIBOR and Collateral Securities backed by loans where one or more loans in the portfolio is a LIBOR Linked Loan. The add-on will be 10% from April 1, 2021, 40% from September 1, 2021 and 100% from December 31, 2021.

The market notice also stipulates that from April 2021, LIBOR Linked Collateral that matures after December 2021 will be ineligible for use in the Sterling Monetary Framework.

View the market notice.

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